Groundbreaking for new homes and permits for future building both hit a 14-year low last month, reviving worry about a deepening housing slump and prompting investors to boost bets on interest-rate cuts.
Housing starts tumbled 10.2 percent to a 1.191 million unit annual rate, the slowest since March 1993, the Commerce Department said. Economists had expected starts to slip, but the sharpness of the downturn took them by surprise.
"There is no end in sight," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "The builders didn't realize how many cancellations they are going to face. If we hit 1.0 million start range, it's consistent with recessions in the past. And we are heading in that direction."
The dour report pushed up prices for bonds and weighed on the dollar as traders saw greater likelihood the Federal Reserve would follow up a rate cut it made last month with another at its next meeting on Oct. 31.
A separate report, however, showed the economy facing inflation pressure from food and energy, which could complicate the Fed's thinking on borrowing costs.
Consumer Prices Rise
The Labor Department said the Consumer Price Index, the most broadly used gauge of inflation, rose 0.3 percent last month, the biggest gain in four months. However, the core rate, which excludes energy and food, moved up a modest 0.2 percent.
"The housing starts and consumer price inflation numbers highlight the tough dilemma the Federal Reserve faces," said Bernard Bauhmohl, managing director of the Economic Outlook
Group in Princeton Junction, New Jersey.
"Both of its mandates --- averting recession and controlling inflation --- are now being challenged," he said.
Meanwhile, the Fed said the economic growth continued to slow since August while housing markets weakened further.
"Residential real estate markets continued to weaken, and most districts reported additional declines in home sales, prices and construction," the Fed said its so-called Beige Book of anecdotal economic conditions.
Paulson on Housing
U.S. Treasury Secretary Henry Paulson on Tuesday identified housing as "the most significant current risk" to the economy, while Fed Chairman Ben Bernanke said Monday the sector would
be a significant drag on the economy into next year.
The Commerce Department said permits for future building fell 7.3 percent last month, the sharpest drop since January 1995, to an annual rate of 1.226 million, the lowest level
since July 1993.
A separate report Wednesday showed mortgage applications rose for a second straight week but some analysts said that was a sign potential borrowers were being turned down for loans and were applying more frequently.
Interest rate futures markets moved to price in even odds that the Fed, which slashed benchmark borrowing costs by a surprisingly large half-percentage point to 4.75 percent last
month, would lower them again by a quarter-point on Oct. 31.
Late yesterday, futures prices implied only a 38 percent chance of a rate cut.
Still, rising fuel and food costs could stay the Fed's hand. Food prices rose 0.5 percent last month, while energy costs increased 0.3 percent.
In addition, oil prices hit a record high $89 a barrel on Wednesday, before easing, increasing worries that those costs could drive inflation higher and hinder economic growth.
Over the past 12 months, consumer prices have risen 2.8 percent, the largest year-on-year gain since March. Core prices were up 2.1 percent, the same as in August when the
year-on-year gain eased to a nearly 1-1/2 year low.